Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  200. There is a somewhat strange editorial comment in the Financial Times on 21 March entitled "Delay the postal delivery", which argued that rural services more than cover their direct costs. Even if the competitors chopped off all of the urban mail what remained would still be profitable. That seems somewhat strange to me because obviously all of the urban mail is covering all of the indirect costs, then if the rural services only have to cover the direct costs when then the competition comes in and cuts the urban delivery then obviously the rural delivery will not cover costs any more. It seems strange that even the FT is adopting a flawed economic analysis of the Regulator hook, line and sinker. Would you agree that you will not face competition in your rural services because nobody is going to go after those and there is this real danger that competitors will offer a universal service simply by providing 90 per cent of it themselves and then put a Royal Mail stamp on the other 10 per cent to get cheap rural penetration on the back of fixed costs?
  (Mr Roberts) I cannot see any business trying to set up a universal service to deliver everywhere. As the Chairman said and you just said, the likelihood is they will cream off the bits on which they can make the most profit and leave us to take the bits which are more expensive to deliver.

  201. What would you say to people who are saying we are waving these as massive job cuts as an excuse behind what is happening with the Regulator, in the same way some people think the airlines are chopping lots of job with the excuse of September 11, and using this opportunity to make draconian and unnecessary job cuts.
  (Mr Roberts) The Chairman started off by saying the Board had been incompetent over the last few years, I do not necessarily agree with that. The purpose of the changes is to get the business back into profitability. We have talked about for at least six months, well before the Regulator put out his proposals, and it is nothing to do with just regulation, it is to do with our concern about competition.

  202. I accept that you are trying to cut costs because of the advent of more competition in the EU. Why have you not provided us with a detailed breakdown of changes in transport costs, changes in labour costs, changes in acquisition costs, a proper breakdown of why you find yourselves in these difficulties, other than the fact that the stamp prices have not gone up probably enough?
  (Mr Roberts) We could do that if that would help.

  203. It would.
  (Mr Roberts) It would show where costs have risen.

  204. I heard a suggestion today that the reason the Regulator delayed the consultation deadline was because there was a lack of clarity in terms of what share of the market was competed with and the reason for it is that you did not understand your own books?
  (Mr Roberts) That is absolutely wrong.

  205. You can and will provide a detailed break down of changes in costs, the quality of idea about how transport charges, British Rail and acquisition costs, and all of the rest of it, changed. It would be a useful if we had some breakdown. As I understand it, correct me if I am wrong, the labour costs for the British postal service are relatively cheap. That is true, is not, the labour costs?
  (Mr Roberts) The labour costs are compared to the labour costs—[1]

  206. In Germany or Holland. The difficulty is that the price of stamps is very cheap and you cannot make the margins you might want to. I do not know whether you can answer this, do you feel that Postcomm should allow a marginal increase in stamp prices in order to enable a less painful transition towards full liberalisation and you can have structural change over a period of few years in line with EU at a price that the British public would, we found, certainly pay from the perception of value-for-money?
  (Mr Roberts) It is something that we are thinking about now.

  207. Perhaps you should not just think about it, you should tell Postcomm what you want.
  (Mr Roberts) We are thinking about it in terms of when we put a proposal forward to Postcomm and whether we do this at the time when we respond to their consultative document. You are quite right, there has been one price increase on first class mail in the last five years, and second class mail has gone down a penny in that period.

  208. I notice your income has risen from six billion to eight billion in five years and yet you have moved into negative profit, presumably because the price rise has not kept pace with the cost increase?
  (Mr Roberts) Over the last five years our first class prices in the United Kingdom in real terms are about 8 per cent down.

  209. I want to turn to somebody slightly microscopic, my fear is the deafening cry of cut costs has been overwhelming the rational voice of revenue opportunities. In particular in my own patch, Croydon, East Croydon Station is on a multi modal transport interchange with people using trams, trains and buses. I understand the unions agreed to open a post office when people were going through the station, namely before and after work, when it is, of course, closed. The idea was put forward, the council had their own facilities there, the retailers will lend support to try and make this Crown post office in the middle of a residential area as well viable. Yet, the response has been no, no we are going to close it down anyway. Does that not show that at this time, at least, there is not a mood of looking at revenue opportunity but, in fact, it is all just get the axe out and chop jobs, that is not good management.
  (Mr Roberts) I am not aware of the details of that. I would be surprised if it was done purely for that reason. More often than not we find it is very difficult to make them pay depending where they are, what the rental is or anything else. If there was an opportunity to make it pay I would be very surprised if that is the reason for chopping it. All of us here are against that for the very reason you say, the whole point is it is much easier to try and grow revenue than to cut costs.

  210. I do not know whether it is easier, it is something that you should be focusing alongside cost cutting. On another occasion when I spoke to the Regulator about this issue of a European market place he said that Postcomm had within its terms of reference level playing fields and in the same breadth said that he would not push forward with his proposals if he thought they significantly damaged Consignia. Do you agree that is a completely ridiculous position to hold and in an international market place of liberalisation the Regulator should and must have a view towards a level playing field and fair competition?
  (Mr Roberts) I would like to think so. I think in terms of the basis on which the Regulator has been set up and the duties he has I am not clear that that is something written into his duties.
  (Mr Sweetman) His prime duty is to protect the USO and wherever appropriate to introduce competition. The hierarchy of duty is very, very clear, his overriding duty is protection of the USO. Once that is protected, and notably protected, then whatever appropriate competition can be introduced.

  211. Would you agree in short that premature deregulation of the market and the failure to allow prices to rise end ups with a situation where the British public would prefer to see more protection in the short-term as a danger to the basis service that we enjoy in the United Kingdom and to the whole provision of post offices across the country?
  (Mr Sweetman) Yes.

  212. Finally, in terms of the cuts that have been suggested would you not agree that despite what you said about not many strikes for six months, given the history and the nature of the industry do you not think there is every likelihood there will be a major strike in the British postal service resulting from these cuts that have come from the Regulator's proposals?
  (Mr Roberts) I hope not very much indeed. We have tried over the last three or four months to talk constantly with the unions. I believe the unions do understand the serious position we face and why we are there and what we are trying to do about it together. I welcome some of the statements I have seen today, which have been along the lines as long as there is no compulsory redundancy they want to work with us to try and get the organisation and business sorted out. I very much hope not, because I think it would be disastrous for everyone one concerned in the industry and many, many customers outside.


  213. I must press you on one aspect of Mr Davies' questioning, how many of the massive job losses announced today are due to Postcomm's proposal?
  (Mr Roberts) It is very difficult to say that they are. We needed to make changes in the parcel business, of course the parcel business is a competitive business and not a regulated business. Our transport review is just that. I do not think it would be fair to say that today's changes have been generated just by Postcomm's proposals. They have certainly been generated by the fact that since we have become a plc we need to get everything sorted out so what we have a business which is viable and profitable going forward.

  Chairman: This is very important. Did you not tell my colleague 5,000, or did I mishear?

Geraint Davies

  214. The suggestion I made a note of, was 10,000 from the EU proposals, 5,000 from the early entry Regulator's proposals and a global total of 30,000.
  (Mr Roberts) You were saying, as I understood it, what might the impact be if we had to take a hit of £750 million, £500 million plus £250 million, as a result of these proposals?

  215. Which is what you say, we do have to take a hit.
  (Mr Roberts) I was saying it was very difficult to equate that to jobs. If you did a rough calculation it would be the number I gave you. In terms of today's announcements they are very much about us getting the cost base of the business right and it would not be correct to say because of Postcomm's proposals we have done this and make a direct connection.

  216. There are as a result of your historical position?
  (Mr Roberts) Yes.

Mr Gibb

  217. Are you inefficient?
  (Mr Roberts) How do you define efficient? I can give you a number of statistics about the amount of mail we handle per working hour and the way that has gone up over the years.

  218. You must know whether you are inefficient or not? Are you over-manned?
  (Mr Roberts) I think we are probably over-manned. One of the reasons we talked about making changes today is to reduce that manning and also still maintain the kind of business and size of business that we have.

  219. How long have you been over manned?
  (Mr Roberts) Probably for 300 years, I mean as long as there has been a monopoly. I think the issue about monopolies—this is the debate about competition—is that a monopoly inevitably means that you do not have the pressures from outside, you have only got the pressures from inside and as much as you try and mirror competition and introduce it internally, I do not think that is as effective as looking, as we now do, at what our competitors do. We have now got the two benchmarks, the two privatised post offices, and we can look at their efficiency. It was that which led us to make the proposals we did for reducing the cost base by 15 per cent.

1   Ev, Appendix 2, p 51. Back

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